Audience: All employed workers
If you are employed in the United Kingdom, the chances are that your income tax and National Insurance contributions are collected through a system called PAYE — Pay As You Earn. It is the most common method used by HMRC (His Majesty's Revenue and Customs) to collect tax from employees, and yet many people who use it every month have little understanding of how it actually operates. This guide explains PAYE from the ground up, so you can feel confident that your tax affairs are in order.
Understanding PAYE is important not just out of intellectual curiosity, but because mistakes can be costly. Every year, HMRC estimates that millions of employees either overpay or underpay their tax due to issues with the PAYE system — issues that could often be avoided with a little knowledge.
PAYE was introduced in the United Kingdom in 1944 during the Second World War, largely as a way for the government to collect taxes more efficiently at a time of national crisis. Before PAYE, employees were typically required to calculate and pay their own income tax at the end of each year, which led to difficulties for both the taxpayer and the government.
The genius of the PAYE system is that it spreads tax collection across the entire year. Rather than facing one large tax bill in January, your employer deducts the correct amount of income tax and National Insurance from each wage or salary payment before it reaches your bank account. This makes the tax system far more manageable for the majority of workers.
When you begin a new job, your employer will ask for your National Insurance number and your tax code. Your tax code — which we explain in detail in a separate article — tells your employer how much of your income should be free from tax (your personal allowance) and whether there are any other adjustments to make.
Each time you are paid, your employer's payroll system performs a calculation. It takes your gross pay for that period, deducts your personal allowance (spread evenly across the year), and then applies the relevant income tax rates to the remainder. The result is the amount of tax deducted from your pay. Your National Insurance is calculated separately on a similar basis.
The employer then pays the tax and National Insurance deducted to HMRC on your behalf, usually by the 19th of the following month (or 22nd if paying electronically). This means you never directly handle the tax payment yourself — it is done entirely through your employer.
For the 2024/25 tax year, the income tax rates in England, Wales, and Northern Ireland are as follows. The first £12,570 of your income is covered by the personal allowance and is entirely free from income tax. Earnings between £12,571 and £50,270 are taxed at the basic rate of 20%. Earnings between £50,271 and £125,140 are taxed at the higher rate of 40%. Any earnings above £125,140 are taxed at the additional rate of 45%.
It is important to note that Scotland has its own income tax rates, which differ slightly. If you live in Scotland, you will be subject to Scottish income tax rates, though PAYE still applies as the collection mechanism.
The rates above apply to your taxable income — that is, your income after your personal allowance and any other deductions (such as pension contributions) have been subtracted. PAYE ensures that these rates are applied incrementally throughout the year, so you should rarely face a surprise at year end.
Alongside income tax, PAYE also collects your National Insurance contributions (NICs). As an employee, you pay Class 1 National Insurance. For 2024/25, you pay 8% on earnings between £12,570 and £50,270 per year, and 2% on earnings above that threshold.
Your employer also pays employer's National Insurance on top of your wages — this is a separate cost to them and does not appear on your payslip as a deduction from your pay. However, it is worth being aware of, as it forms part of the total cost of employing you.
National Insurance contributions build up your entitlement to the State Pension and certain other state benefits, including Statutory Sick Pay, Maternity Pay, and Jobseeker's Allowance. This is why it is important to ensure that your NI record is complete — particularly if you have periods out of work.
The UK tax year runs from 6 April to 5 April the following year. At the end of each tax year, your employer will provide you with a P60 — a document that summarises your total earnings and the total amount of tax and National Insurance deducted throughout the year. You should keep your P60 safe, as you may need it to complete a self-assessment tax return, claim a tax refund, or provide evidence of your income.
HMRC also reviews PAYE records at the end of the tax year. If you have paid too much tax — perhaps because you changed jobs mid-year or received a one-off payment — you should receive a P800 tax calculation from HMRC informing you of the overpayment and how you can claim a refund. Equally, if you have underpaid, you may be asked to pay the difference, usually by having your tax code adjusted the following year.
One of the most frequent issues with PAYE arises when someone starts a new job without providing their P45 from their previous employer. Without a P45, the new employer may apply an emergency tax code, which often results in you paying more tax than necessary in the short term.
Another common problem occurs when people have multiple jobs or income sources. If you work for two employers simultaneously, each employer runs PAYE independently, and you may end up paying the wrong amount of tax across the two. It is important to notify HMRC of any change in your employment situation.
Finally, changes in your personal circumstances — such as getting married, having a child, or starting to receive certain benefits — can affect your tax code and therefore the amount of PAYE deducted. Keeping HMRC informed of changes through your Personal Tax Account online can help prevent overpayments or underpayments from building up.
One of the best steps you can take is to register for HMRC's Personal Tax Account at gov.uk. This free online service allows you to check your tax code, review your income and tax records, update your personal details, and claim refunds — all without the need to phone HMRC or visit a tax office.
A good tax calculator can also help you understand exactly how much tax and National Insurance you should be paying on your salary. By entering your gross pay, you can quickly see whether the deductions on your payslip appear correct. If there is a discrepancy, it is worth investigating further — either through your employer's payroll department or directly with HMRC.
**Disclaimer: ***This article is for general information purposes only and does not constitute tax advice. Tax rules can change and individual circumstances vary. Always consult a qualified tax adviser or contact HMRC directly for advice specific to your situation.*